Global Equities

Portfolio Manager David Souccar identifies three types of quality companies: Leaders have a rare combination of high returns and high predictability, Defenders grow slower but can protect in down markets, and Opportunity seekers can profit in uncertainty but are less predictable. Like a high-performing team, a successful quality portfolio has the optimal combination of all types of players.

As the landscape shifts, investors may now be exposed to risks that were previously disguised by a prolonged era of accommodative monetary policy. Today, it pays to be wary. A focus on quality can protect in a downturn and provide a smoother ride through the cycle.

Legendary investor Charlie Munger, who recently passed away, followed a simple philosophy of “soldiering on” – persevering through challenging times while also knowing when to seize opportunities. Munger’s wisdom guides us as we manage key risks and seek to find opportunities in 2024.

With regional banks in the US concerned about deposit flight, financial conditions are tightening, increasing the probability of a hard landing for the economy. Quality companies that do not rely on leverage and whose earnings tend to be more resilient during times of economic weakness can be an attractive option for investors.

Low interest rates, declining tax rates, and constrained wages contributed to margin expansion for large US companies over the past decade. Companies whose growth is driven by these temporary factors may be more vulnerable in tough conditions, while quality companies with structural growth drivers designed to succeed in all conditions may prevail.

ESG research is an extension of our philosophy of long-term thinking and fits seamlessly into our existing research process. We focus on material issues rather than broad ESG scores, which enables us to understand and get ahead of risks that can jeopardize earnings predictability.

Structural themes underlie opportunities in the year ahead. Our Quality Growth portfolio managers expect stock performance will be more closely tied to earnings growth, the US consumer will remain healthy, select emerging markets are poised for continued growth, and certain Chinese stocks will benefit from a reopening.

As the cycle of market excesses comes to an end, how can investors prepare? Tilt towards a portfolio of less-cyclical companies with pricing power; don’t mistake quality companies for those with an exciting story; and watch out for underestimated risks, such as carbon emission liabilities.

Like the end of a long evening of revelry, the decline in the fortunes of momentum growth and value companies leaves the Quality Growth investors, in our opinion – still standing. Companies with pricing power, low debt, and consistent earnings may be the slow but steady winners in the race to beat the market.

As pressure has been building on Chinese technology stocks given growing regulatory threats, some of the key players in the Chinese internet sector are shifting to a more prudent strategy, pulling back to focus closer on the core business rather than investing in new growth areas.

Market sentiment reflects growth that will continue at past levels, yet economies and businesses globally are facing stiff headwinds – high government debt, rising inflation, and supply chain bottlenecks. As markets shrug off risks, expect volatility and a divergence in company performance in 2022.

European equities have lagged the US for more than a decade. But there are reasons to believe that Europe can outperform again: The benchmark is now more exposed to higher growth companies, valuations are attractive, macro reforms have mitigated risks and Europe is leading the way in ESG.